Coles cuts feed price-war fears

First it slashed the price of house-brand milk to $1 a litre. Now Coles is planning to cut prices on a range of grocery staples, including bread, turning up the heat on larger rival
Woolworths
in an increasingly bitter battle for market share.

Industry players believe
Wesfarmers
’ Coles division is preparing to follow up last week’s 33 per cent price cut in house-brand milk by reducing the price of house-brand bread by as much as 63 per cent, from around $2.75 to $1 a loaf.

Coles declined to detail its plans, but suggested more price reductions were in the wings.

“We’d never flag our intentions about pricing initiatives because it would be competitively sensitive," a spokesman said on Friday.

“We’ve reduced prices now as part of our ‘down down prices are down campaign’ on over 5000 product lines and obviously we’ll continue to look at further value on products that customers buy the most.

“Coles is continuing its value campaign for customers, that’s our primary intent, and it’s up to the other retailers whether they want to match the value we’re providing to our customers."

Woolworths, Aldi and Franklins have pledged to match Coles’s house-brand milk prices and will probably have to follow suit in house-brand bread to remain price competitive.

Suppliers have funded most of the price cuts on branded groceries, but retailers have said they will fund the reduction in house-brand milk prices themselves. They will probably have to cover any reduction in the price of private label bread.

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However, manufacturers such as George Weston Foods and
Goodman Fielder
, which supply house-brand bread to retailers, may come under pressure to reduce prices for branded bread, which normally sells for 60 per cent more than house-brand product.

Coles’s latest move has triggered fears that the 12-month marketing war between the major grocery chains could turn into a full-blown price war, delivering cheaper groceries for consumers but damaging retailers’ and suppliers’ profit margins.

On Monday, Woolworths, which has cut prices on more than 4000 groceries, downgraded its full-year profit forecast for the first time in 19 years, blaming price deflation and one-off problems such as the floods. Woolworths now expects net profit to rise by 5 to 8 per cent to between $2.12 billion and $2.18 billion, compared with earlier forecasts of 8 to 11 per cent growth.

Coles hasn’t given detailed profit forecasts. Its food and liquor customers have risen by 2 million to 15 million a week over the past two years, but still lag behind those at Woolworths’ supermarkets and liquor stores, which serve 18.5 million a week.

“We see Woolworths maintaining its clear number one market share in Australian supermarkets, but believe the golden period is over," Morgan Stanley analyst Thomas Keirath said.